10 months ago

BusinessDay 06 Mar 2018


Tuesday 06 March 2018 C002D5556 FINANCIAL TIMES COMPANIES & MARKETS @ FINANCIAL TIMES LIMITED 2015 BUSINESS DAY A3 Replacing Libor proves harder in practice after scandal Floating interest rate benchmark remains a pivotal part of the financial system PHILIP STAFFORD Abolishing a tarnished benchmark reference rate such as Libor is proving far harder in practice and comes in spite of regulators pushing the market towards adopting a replacement. The floating interest rate remains a pivotal part of the financial system and today contracts worth a notional $240tn use Libor for establishing the cost of payments on corporate business loans, credit cards, auto loans and derivatives such as interest rate swaps, according to consultants Oliver Wyman. As authorities seek a replacement benchmark, they want a rate based on frequent transactions and one that does not require a component that assesses bank creditworthiness, as Libor does. From April, the UK and US will begin publishing rates for an alternative sterling and dollar benchmarks respectively. Europe, though, has issues. Last month it abandoned a review of Eonia, a risk-free overnight rate, because that was seen as unlikely to meet the EU’s new standards on benchmarks from 2020 — now just 17 months away. So far, the debate has largely involved regulators and banks that contribute daily Libor submissions, with both keen to move away from the Activity in Britain’s services sector grew at its fastest rate for four months in February as stronger global growth drove demand for business services. In the sector’s latest survey of purchasing managers, companies also reported the biggest jump in new orders since May 2017 over the month, driven by new business-to-business work. But businesses cautioned that stretched household budgets kept domestic consumer spending weak, with average UK wages failing to keep pace with rising prices last year. Overall the IHS Markit/CIPS purchasing managers’ index for services rose to 54.5 in February from 53.0 in January. Anything above 50 indicates an expansion. Analysts had expected only a modest increase to 53.3. However, Monday’s survey, combined with weak data from similar reports of managers in the manufacturing and construction sectors last week, suggest that the UK economy has not grown much since the end of last year. Chris Williamson, chief business economist at IHS Markit, said: “The PMI surveys so far collectively point to the economy growing by nearly 0.4 per cent in the first quarter to indicate that a resiliently steady pace of expansion has been maintained.” Companies reported that cost pressures eased in February, falling to their lowest level for a year-and-a-half. status quo. The views of end users and consumers has been less prominent, but that is now changing. For European reforms to be successful (ie not upend the market), the ECB’s Benoît Cœuré recently said a broad-based consensus beyond industry working groups is needed and should “include the wider financial sector community’’. The danger here is that such a group articulates some uncomfortable truths. Chief among them is that benchmarks thrive and endure because they serve a useful purpose. In Libor’s case it offers stable, predictable payments known months in advance. Second is the problem changing all the existing contracts, especially bonds, that reference Libor. It is “a very big question unanswered”, as FCA chief Andrew Bailey acknowledges. An audience vote last week at the Structured Finance Industry Group in Las Vegas, attended by 7,000 institutional investors, indicated the majority were in favour of preserving an enhanced form of Libor, according to a person present. At that event, Tim Bowler, president of IBA, the Libor administrator, reassured them that it would continue to improve the benchmark, based on market feedback from more than 1,000 stakeholders. Perhaps banks and regulators see an end to Libor around the turn of the decade. It may well live on. UK services grow at fastest rate in four months in February Survey of purchasing managers shows companies reporting biggest jump in new orders since May GAVIN JACKSON However, they also said that they were facing a growing backlog of work due to the difficulty of finding skilled workers. Rising domestic costs due to a tight labour market have been cited by the Bank of England as justification for a possible interest rate rise later this year, even as higher inflation brought on by the fall in the value of the pound begins to fade. However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the survey pointed to slowing growth, and inflation was likely to be lower than forecasted by the BoE. “The [Monetary Policy] Committee might feel it has invested too much reputational capital to hold back from raising rates in May, but the data won’t support a series of hikes this year,” he said. Other figures published on Monday suggested that new car sales declined more slowly in February than in the previous month. Car sales fell by 2.8 per cent compared with the same month the previous year, an improvement on the 6.3 per cent year-on-year drop in January, according to data collected by the Society of Motor Manufacturers and Traders. Economists have used new car sales as an indicator of British consumers’ appetite for making big purchases in the wake of the EU referendum, although the sector is also coping with other challenges, such as a shift away from diesel towards electric cars and changes to taxation. Useful: Libor offers stable, predictable payments known months in advance © Bloomberg Axa to buy Bermuda-based XL Group for $15.3bn Deal gives French company more access to commercial property and reinsurance DAVID KEOHANE AND OLIVER RALPH French insurer Axa is to buy Bermuda-based XL Group in a $15.3bn deal that cements its position as one of the world’s biggest property and casualty insurance companies. It will also give it more access to markets such as commercial property and reinsurance in the latest step in chief executive Thomas Buberl’s plan to change the shape of the business. “It is a unique opportunity to shift our profile from being exposed to financial risks to being exposed to insurance risks,” he said. M&A activity has been gathering pace in the insurance world this year. Already AIG has agreed to pay $5.6bn for Bermuda-based Validus, while Japan’s SoftBank has been in talks about taking a stake in Swiss Re. Last year Axa announced the IPO of its US business, which is heavily exposed to the financial markets and vulnerable to the sort of risks Mr Buberl is trying to move away from. “This is a combination for growth. Axa has a small operation in the field that XL represents. We have €2.3bn of revenue, they have $15bn so there is not much overlap . . . this deal represents lots of potential,” said the chief executive. “This transaction is a unique strategic opportunity for Axa to shift its business profile from predominantly life and savings business to predominantly property and casualty business, and will enable the group to become the number one global property and casualty commercial lines insurer based on gross written premiums,” added Mr Buberl. The all-cash deal at $57.60 a share represents a premium of 33 per cent to XL Group’s closing share price on March 2 2018, according to Axa. Axa shares were down 7 per cent in morning trading on Monday. The French insurer will fund the deal, which was reported over the weekend, using €3.5bn of cash at hand, €6bn from the planned US IPO and related transactions and €3bn of subordinated debt. The flotation was announced last May and is likely to happen in the coming months. There had been debate around whether the cash raised would be used to fund acquisitions or for share buybacks. However, Mr Buberl said he was not keen on buybacks. “Buybacks mean you have no entrepreneurial ideas any more, and I’m full of entrepreneurial ideas,” he said. Mr Buberl had said that proceeds from the float could be used for acquisitions but that Axa was “not looking at tiny deals or very large deals. We are looking for deals worth €1bn to €3bn and for that we need financial flexibility.” Analysts at Goldman Sachs said that “longer term, we believe there is a clear strategic logic to the transaction, which would expedite Axa’s shift in business mix towards a greater reliance on technical earnings and reduced market sensitivity”. They added that the deal “could potentially reduce its financial flexibility for a period”. UBS analyst Colm Kelly was more sceptical: “We think this is not an obvious fit for Axa. Historically, Axa has grown via bolt-on acquisitions to achieve scale, not large scale M&A,” he said. Mike McGavick, who has been XL’s chief executive for the past decade, will stay on as a special adviser to Mr Buberl. Mr McGavick said: “In Axa, we have found like-minded partners committed to the absolute necessity to innovate and move this industry forward.” The deal is expected to close in the second half of 2018. JPMorgan advised Axa on the deal and Morgan Stanley advised XL. Wall Street to open mixed, steel stocks set to rise again PETER WELLS US stocks look set to open mixed on Monday, following gains in Europe but declines in Asia. Futures tip the S&P 500 to open 7.5 points lower at 2,683, while the Dow Jones Industrial Average is expected to open up 28 points to 24,445 while the Nasdaq 100 is expected to start roughly flat at 6,804. US steel stocks look set to contin- FCA fines former Deutsche Bank trader for attempting to rig Libor MARTIN ARNOLD The UK financial watchdog has fined a former Deutsche Bank trader £180,000 for attempting to manipulate the Libor interest rate benchmark and banned him from working in any regulated financial activity. The Financial Conduct Authority said Guillaume Adolph had made at least 20 requests to Deutsche’s Libor submitters to change the Swiss franc and Japanese yen figures they contributed to setting overall Libor rates to benefit his own trading positions. ue firming in the wake of President Donald Trump’s announcement last Thursday that he planned to impose heavy tariffs on steel and aluminium imports. In pre-market trade, Nucor was up 0.9 per cent, US Steel was up 0.4 per cent and AK Steel gained 0.9 per cent. Aluminium producer Alcoa was flat. Mr Trump tweeted on Monday morning that the “Tariffs on Steel and Aluminum will only come off He also “took his own trading positions into account” when acting as Deutsche’s primary Japanese yen Libor submitter and took into account the requests of a trader at another bank when making his submissions. The London Interbank Offered Rate underpins hundreds of billions of dollars of loans and hundreds of trillions of derivatives around the world. Last October, the Bank of England said the financial markets’ reliance on Libor created a significant risk to UK financial stability. Some big investment banks if new & fair NAFTA agreement is signed”, referring to the US’s trade pact with Canada and Mexico. “To protect our Country we must protect American Steel! #AMERICA FIRST”. Overall, US metals names have gained at the expense of their global peers since Thursday. European stock markets were up between 0.2 per cent and 0.6 per cent in the wake of Italy’s general election, while London’s FTSE 100 was up 0.2 per cent during lunch. — including Deutsche — and interdealer brokers have paid almost $10bn in fines to authorities around the world while a handful of traders have gone to jail on Libor-rigging charges. Mr Adolph worked at Deutsche from 2008 to the end of 2011. The FCA said: “Mr Adolph acted recklessly, and therefore with a lack of integrity, in deliberately closing his mind to the risk that his behaviour in relation to the submission of Swiss franc and Japanese yen Libor rates was contrary to proper standards of market conduct.”

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